Renewables XVIII – Demand Management & Levelized Cost

About 100 years ago I wrote Renewables XVII – Demand Management 1 and promised to examine the subject more in a subsequent article. As with many of my blog promises (“non-core promises”) I have failed to do anything in what could be even charitably described as a “timely manner”. I got diverted by my startup.

However, in a roundabout way I came across some articles that help illuminate the energy subject better than I could. While travelling I listened via audible.com to two great books by Timothy Taylor – America and the New Global Economy and A History of the U.S. Economy in the 20th Century. It turns out that Timothy Taylor is the editor of the Journal of Economic Perspectives (and also writes a blog – the Conversable Economist – which is great quality). This journal has recently made its articles open access back to the dawn of time and I downloaded a few years of the journal.

Digressing on my digression, in one of those two books, Taylor made an interesting comment about economists views on climate change which sparked my interest in studying the IPCC working groups 2 & 3 – impacts and mitigation. Possibly some articles to come in that arena, but no campaign promises. It’s a big subject.

The Journal of Economic Perspectives, Volume 26, Number 1, Winter 2012 contains a number of articles on energy, including Creating a Smarter U .S . Electricity Grid, Paul L Joskow. I recommend reading the whole paper – well-written and accessible. He comments on some of the papers that I had already discovered. A few comments selected:

Smart grid investment on the high voltage network has only a limited ability to increase the effective capacity of transmission networks. A large increase in transmission capacity, especially if it involves accessing generating capacity at new locations remote from load centers, requires building new physical transmission capacity. However, building major new transmission lines is extremely difficult. The U.S. transmission system was not built to facilitate large movements between interconnected control areas or over long distances; rather, it was built to balance supply and demand reliably within individual utility (or holding company) service areas. While the capacity of interconnections have expanded over time, the bulk of the price differences in Table 1 are due to the fact that there is insufficient transmission capacity to move large amounts of power from, for example, Chicago to New York City. The regulatory process that determines how high voltage transmission capacity (and smart grid investments in the transmission network) is sited and paid for in regulated transmission prices is of byzantine complexity..

The U.S. Department of Energy has supported about 70 smart grid projects involving local distribution systems on a roughly 50/50 cost sharing basis, with details available at 〈http://www.smartgrid.gov/recovery_act/tracking_deployment /distribution〉. However, a full transformation of local distribution systems will take many years and a lot of capital investment. Are the benefits likely to exceed the costs? In the only comprehensive and publicly available effort at cost–benefit analysis in this area, the Electric Power Research Institute (2011a) estimates that deployment (to about 55 percent of distribution feeders) would cost between $120–$170 billion, and claims that the benefits in terms of greater reliability of the electricity supply would be about $600 billion (both in net present value). Unfortunately, I found the benefit analyses to be speculative and impossible to reproduce given the information made available in EPRI’s report..

And on demand management programs’ impacts on peak demand:

The idea of moving from time-invariant electricity prices to “peak-load” pricing where prices are more closely tied to variations in marginal cost has been around for at least 50 years..

A large number of U.S. utilities began offering time-of-use and interruptible pricing options for large commercial and industrial customers during the 1980s, either as a pilot program or as an option. More recently, a number of states have introduced pilot programs for residential (household) consumers that install smart meters of various kinds, charge prices that vary with wholesale prices, and observe demand..

Faruqui and Sergici (2010) summarize the results of 15 earlier studies of various forms of dynamic pricing, including time-of-use pricing, peak pricing, and real-time pricing.. Faruqui (2011) summarizes the reduction in peak load from 109 dynamic pricing studies, including those that use time-of-use pricing, peak pricing, and full real-time pricing, and finds that higher peak period prices always lead to a reduction in peak demand. However, the reported price responses across these studies vary by an order of magnitude, and the factors that lead to the variability of responses have been subject to very limited analysis..

Accordingly, it seems to me that a sensible deployment strategy is to combine a long-run plan for rolling out smart-grid investments with well-designed pilots and experiments. Using randomized trials of smart grid technology and pricing, with a robust set of treatments and the “rest of the distribution grid” as the control, would allow much more confidence in estimates of demand response, meter and grid costs, reliability and power quality benefits, and other key outcomes. For example, Faruqui’s (2011b) report on the peak-period price responses for 109 pilot programs displays responses between 5 to 50 percent of peak demand. An order-of-magnitude difference in measured price responses is just not good enough to do convincing cost–benefit analyses, especially with the other issues noted above. In turn, the information that emerges from these studies could be used to make mid-course corrections in the deployment strategy. Given the large investments contemplated in smart meters and complementary investments, along with the diverse uncertainties that we now face, rushing to deploy a particular set of technologies as quickly as possible is in my view a mistake.

What I observed from reading a lot of papers back when I had promised a followup article (on demand management) was lots of fluff and a small amount of substance. As Joskow says, a wide range in potential outcomes, and not much in the way of large-scale data to draw real conclusions.

In that same linked document above you can also read other papers including: Prospects for Nuclear Power, Lucas W Davis; The Private and Public Economics of Renewable Electricity Generation, Severin Borenstein. Both of these papers are excellent.

Reading the Joskow paper in JEP I thought his name was familiar and it turns out I already had three of his papers:

This paper makes a very simple point regarding the proper methods for comparing the economic value of intermittent generating technologies (e.g. wind and solar) with the economic value of traditional dispatchable generating technologies (e.g. CCGT, coal, nuclear). I show that the prevailing approach that relies on comparisons of the “levelized cost” per MWh supplied by different generating technologies, or any other measure of total life-cycle production costs per MWh supplied, is seriously flawed..